Spotify aims to avoid a stock pop on its trading debut

New York

SPOTIFY has avoided the traditional route to becoming a public market company at every stage. Listing day is going to be no different.

A successful trading debut for the music-streaming company won't be judged on whether the shares jump 30 per cent - the usual benchmark for a triumphant initial public offering (IPO). Instead, Spotify Technology and its advisers would prefer a less exciting outcome, said people familiar with the matter.

For Spotify, a favourable first day won't be defined by how much the share price climbs from the open to the close, said the people, who asked not to be identified because the matter is private. Instead, its goal is to have the stock look like it would on a run-of-the-mill day - with shares trading efficiently with little volatility as soon as possible.

That's in line with why chief executive officer Daniel Ek has said Spotify chose a direct listing, to avoid "the pomp and circumstance" of an IPO. Still, the company has drummed up the most noise around an alternative means of going public since Google sold stock in a Dutch auction, in which investors submitted bids over the Internet, fax and telephone.

And Spotify is poised to be of a comparable size.

While Spotify's exact valuation won't be determined until Tuesday, the stock is likely to trade at a market value of about US$25 billion, the people said.

Spotify declined to comment.

The best-case scenario would be modest intra-day movement with trading volume similar to a typical IPO, in which 50 per cent to 100 per cent of tradable shares change hands, the people said. The worst would be a stock that swings wildly or lacks the available shares to trade smoothly.

Unlike a traditional IPO, Spotify won't sell a set number of shares at a specific price to a known list of investors before trading starts. The company's first public share price will be determined at the opening bell by the supply of shares that existing holders are willing to sell, as well as demand for them.

The portion of shares that can be floated is much greater than in an IPO - about 90 per cent - and, except for Tencent Holdings, there's no lockup period. That means insiders don't have to wait months to sell their holdings. As at March 21, Spotify had 178.1 million ordinary shares outstanding, according to a filing. While almost all existing ordinary stock holders can sell, none of them have to.

Spotify's stock is getting off the ground with the help of advisers Goldman Sachs Group Inc, Morgan Stanley and Allen & Co and designated market maker Citadel Securities LLC.

With the direct listing, there's no bank acting as a stabilisation agent, the firm that oversees first-price setting and has the ability to help buoy a tumbling stock by buying shares. Instead, Morgan Stanley has been mandated to help Citadel determine the open price based on supply and demand intel gleaned from conversations with existing and potential investors.

In a typical IPO, the supply side of the equation doesn't usually change much. The company and, potentially, a few existing shareholders, offer a set number of shares at a valuation they think the market will bear. Then underwriters hammer out the number of shares investors want and at the price they will offer.

With Spotify, there's no predetermined supply and the company isn't selling in the offering. The company's advisers have had to work a long list of existing investors to try to discern whether they might sell and at what price - with no guarantee that they won't change their minds. Those conversations with investors - venture capitalists, institutional investors and family offices - took more than six weeks, the people said.

The advisers have done the same with potential buyers, the people said. In addition to the familiar conversations about potential share price, they have discussed the process itself and getting shares in a tradable format, with buyers and sellers having the correct accounts.

A key aim has been getting as many of the existing shareholders who want to sell to agree to do so as quickly as possible, even before the open price is set, the people said. That could help manage volatility and generate sufficient supply to ward off a liquidity squeeze, in which a shortage of shares runs up their price.

Getting shares to change hands swiftly can also help avoid any ill effects of this year's US tech selloff and broader market volatility as US President Donald Trump imposed tariffs and threatened Amazon.com. Facebook privacy flaws were also revealed in connection to a firm that worked with Mr Trump's 2016 campaign.

The Nasdaq 100 fell 2.9 per cent on Monday and the Cboe Volatility Index jumped to 23. Those worries aren't expected to affect Spotify's first day of trading though, the people said.

The trading desks at Morgan Stanley and Goldman Sachs are expected to see a lot of the transaction volume after Spotify's shares start trading, the people said.

Spotify has tried to guide investors in its listing prospectus by disclosing the wide range of values at which shares have sold in private transactions. Last year, the company's valuation ranged from US$6.3 billion to US$20.9 billion for the 12.8 million shares that changed hands, based on the stock price and shares outstanding listed in the filing. This year, the valuation has been calculated at US$8.7 billion to US$23.6 billion for the 7.9 million shares that traded.

It could take hours after the market opens for Spotify shares to find a comfortable trading level and establish a valuation, the people said. Investors may have to wait a while to see if Spotify can pull off its dream of a stable, low-drama listing. BLOOMBERG